In re Diasonics Securities Litigation

Decision Date21 September 1984
Docket NumberNo. C-83-4584 RFP.,C-83-4584 RFP.
Citation599 F. Supp. 447
CourtU.S. District Court — Northern District of California
PartiesIn re DIASONICS SECURITIES LITIGATION. This document relates to: ALL ACTIONS.

COPYRIGHT MATERIAL OMITTED

David B. Gold, Paul F. Bennett, John W. Allured, Law Offices of David B. Gold, P.C., William S. Lerach, Keith F. Park, Margaret G. Dobies, Milberg, Weiss, Bershad, Specthrie & Lerach, San Diego, Cal., Arthur N. Abbey, Ralph L. Ellis, Abbey & Ellis, New York City, for plaintiffs.

William I. Edlund, Parker A. Maddux, Karen J. Wegner, Pillsbury, Madison & Sutro, San Francisco, Cal., for defendants.

Michael F. Perlis, Pamela J. Kreuzberger, Pettit & Martin, San Francisco, Cal., for defendants Arthur Rock and Robert Noyce.

M. Laurence Popofsky, Michael L. Rugen, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for defendant underwriters L.F. Rothschild, Unterberg, Towbin, F. Eberstadt & Co., Inc. and Hambrecht & Quist, Inc.

William I. Edlund, Parker A. Maddux, Karen J. Wegner, Pillsbury, Madison & Sutro, San Francisco, Cal., for defendants Diasonics, Inc., Albert Waxman, Walter Stafford, Leonard Perrone and Anthony DePalma.

OPINION

PECKHAM, Chief Judge.

This complex securities action involves numerous claims raised by various plaintiffs against Diasonics, Inc. ("Diasonics"), certain of its officers and directors ("individual defendants"), and the co-lead underwriters (F. Eberstadt & Co., Inc.; L.F. Rothschild, Unterberg, Towbin; and Hambrecht & Quist, Inc.) ("underwriters"). All defendants are alleged to have participated in the issuance of a materially misleading Registration Statement and Prospectus. The plaintiffs allege that as a result of materially misleading statements and omissions in these documents, Diasonics' common stock was traded at artificially high prices and that the plaintiffs were consequently damaged.

Both the plaintiffs and the defendants raise various motions. They are:

(1) plaintiffs' motion to certify a plaintiff class;

(2) plaintiff Rothenberg's motion to certify a separate section 10(b) class;

(3) plaintiffs' motion to certify a defendant underwriter class; and

(4) defendants' motions for partial dismissal (which includes several sub-motions).

FACTUAL BACKGROUND

Diasonics, a California corporation with its principal place of business in Milpitas, California, develops, manufactures, markets, and services medical diagnostic imaging systems. These sophisticated computer-based X-ray and ultrasound systems are used by physicians in hospitals, clinics, and private practice.

On February 23, 1983, Diasonics commenced its initial public offering of 5,588,000 shares of common stock at an offering price of $22.00 per share. This public offering was made pursuant to a Registration Statement and Prospectus filed with the Securities and Exchange Commission, effective February 23, 1983. Plaintiffs allege that this Registration Statement and Prospectus were materially false and misleading. Specifically, plaintiffs contend that these documents overvalued Diasonics' assets and understated certain delivery and sales problems.

On September 22, 1983, Diasonics first revealed through a press release that it expected a pre-tax loss of $10-14 million for the third quarter of 1983. This expected loss was attributed to a decline in the profitability of its ultrasound and digital X-ray business. On January 31, 1984, Diasonics revealed that it expected a total pre-tax loss of between $60-65 million for the year ending December 31, 1983.

Following these two disclosures, the value of Diasonics' stock declined precipitously. By late September, 1983, following the first press release, the price of a share of Diasonics' common was $9 1/8 bid; by February, 1984, the price had declined to between $4-5 per share.

The plaintiffs have now filed the instant action and allege various statutory and common law claims. In specific, the plaintiffs seek relief under: section 11 of the Securities Act of 1933, 15 U.S.C. § 77k; section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l; sections 17(a)(2) and (a)(3) of the Securities Act of 1933, 15 U.S.C. § 77q; section 10(b) of the Securities Act of 1934 and Rule 10b-5, 15 U.S.C. § 78j(b); section 25400 et seq. of the California Corporations Code; and common law theories of fraud, deceit, and negligent misrepresentation.

DISCUSSION
I. Plaintiffs' Motion to Certify a Plaintiff Class

The plaintiffs seek the certification under Fed.R.Civ.P. 23(b)(3) of the following plaintiff class:

All persons and entities, other than defendants, who purchased the common stock of defendant Diasonics, Inc. from February 23, 1983 through January 31, 1984, inclusive.

Certification of a class under rule 23 requires that the putative class meet the four requirements of rule 23(a) and that it qualify under one of the three subdivisions of rule 23(b).

A. Prerequisites under rule 23(a)

Rule 23(a) sets out the first aspect of class certification:

One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.

The defendants do not dispute that rule 23(a)'s requirement of numerosity has been met here. As this securities action involves, potentially, hundreds of class members, the court finds that the numerosity requirement has been satisfied.

Similarly, the defendants do not challenge the "commonality" requirement of rule 23(a). The misrepresentations alleged by the plaintiffs fit within a common course of conduct. See Harris v. Palm Springs Alpine Estates, Inc., 329 F.2d 909, 914 (9th Cir.1964); Blackie v. Barrack, 524 F.2d 891, 902 (9th Cir.1975), cert. denied, 429 U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976). The court finds that the "common questions of law or fact" requirement has been satisfied.

The defendants do not concede, however, that the remaining two requirements of "typicality" and "adequacy of representation" have been met by all of the named representatives. Specifically, the defendants contend that the claims of various named plaintiffs are not typical of the other class members. Significantly, the defendants do not maintain that all named representatives are inadequate under the rule; they merely contend that seven of the thirteen named plaintiffs have atypical claims and cannot serve as class representatives.

There are two possible responses to this allegation. First, the court could merely accept at face value the defendants' contentions and certify the class using only the unchallenged class representatives.1 Second, the court could review the challenges to each of the seven named class members. In terms of the overall certification motion, it matters little which course the court chooses; the outcome on the underlying plaintiff class certification will remain the same. Even if the court were to strike some or all of the seven challenged class representatives, certification of the plaintiff class would still be proper. However, it may be that the defendants' challenges, if legitimate, could affect the management of this action and hence the court deems it appropriate to consider each of the defendants' challenges.

These challenges to the seven named representatives fall into three generic areas. First, the defendants claim that the putative class representatives cannot establish that they "relied" upon any material misrepresentation and are therefore distinguishable from other members of the class who allegedly did rely. This is a "typicality" challenge. Second, the defendants contend that certain of the named representatives appear to be uninformed about the intricacies and implications of their action. Finally, the defendants argue that certain of the named representatives reside in districts (or countries) far from the locus of this action and will therefore be unable to monitor this litigation on behalf of the class. These last two challenges raise issues of "adequacy."

Before addressing each of these contentions, it is worth noting that the defendants' concern over the typicality and adequacy of the plaintiffs' class representatives is somewhat problematic. As the Seventh Circuit has stated:

it is often the defendant, preferring not to be successfully sued by anyone, who supposedly undertakes to assist the court in determining whether a putative class should be certified. When it comes, for instance, to determining whether the "representative parties will fairly and adequately protect the interests of the class," ... it is a bit like permitting a fox, although with a pious countenance, to take charge of the chicken house.
Eggleston v. Chicago Journeymen Plumbers' Local Union No. 130, 657 F.2d 890, 895 (7th Cir.1981), cert. denied sub nom. Chicago Journeymen Plumbers' Local Union No. 130 v. Plummer, 455 U.S. 1017, 102 S.Ct. 1710, 72 L.Ed.2d 134 (1982). See also Umbriac v. American Snacks, Inc., 388 F.Supp. 265, 275 (E.D.Pa.1975). Nevertheless, the special supervisory role that a court plays in class actions requires this court to scrutinize carefully the ability of named representatives to mount typical claims and to represent the interests of the class adequately and fairly; "it is an essential prerequisite to the right to maintain an action under Rule 23 that the court be certain the representatives will adequately protect the interests of all class members." 7 C. Wright & A. Miller, Federal Practice and Procedure § 1764 at 620 (1972).

The first challenge presented by the defendants is that certain of the named plaintiffs did not rely upon the material misrepresentations allegedly made in Diasonics' Registration Statement and Prospectus when they purchased their...

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